CAPITAL MARKETS AUTHORITY ISLAMIC CAPITAL MARKETS. Research, Market Infrastructure and Product Development

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1 CAPITAL MARKETS AUTHORITY ISLAMIC CAPITAL MARKETS CONSULTATIVE FORUM Research, Market Infrastructure and Product Development 19 TH OCTOBER 2011

2 PRESENTATION OUTLINE Introduction Historical Development of the IFSI Landscape of the IFSI in Africa Snapshot of the IFSI in Kenya Challenges facing the IFSI Key Findings and Recommendations Way forward 2

3 DEVELOPMENT AGENDA The government under the Kenya Vision 2030 plans to transform the country to a middle level economy by 2030 The economic pillar of Vision 2030 identifies financial services as a priority sector with the key objectives of increasing access; improving efficiency and enhanced stability. Kenya to be a regional financial hub with plans to make Nairobi an International Financial Centre. The capital markets are expected to play a critical role in mobilizing savings and investments to achieve the growth targets. 3

4 DEVELOPMENT AGENDA The capital market is expected to play a critical role in achieving the growth targets through: Mobilizing savings and investments in productive enterprise; Facilitating long term infrastructure financing; Diversification of financing for SMEs; Creation of a platform for Kenya to become an International Financial Centre (IFC); Enhancing capital markets trading, reporting, clearing and settlement t infrastructure; t Regional integration initiatives towards a regional market; Financial literacy; and Financial literacy; and Product development 4

5 PRODUCT STRUCTURE IN KENYA Equity market Debt market Derivatives market Ordinary Shares Treasury Bonds Corporate Bonds Preference shares Infrastructure bonds Asset Backed Securities Mortgage Backed Securities Municipal/ County Bonds Futures and Options Swaps Commodity futures Forward Contracts Exchange traded funds Pi Primary and Secondary Market Secondary Market 5

6 CAPITAL MARKETS Licensed/approved d Institutions October Securities Exchange (NSE) 1 2 Central Securities Depositories (CDSC) 1 3 Investment Banks 12 4 Stockbrokers 10 5 Investment advisers 18 6 Fund Managers 20 7 Collective Investment Schemes 16 8 Authorized depositories/custodians 14 9 Credit Rating Agencies 1 10 Venture Capital Companies 1 11 Securities Dealer 1 Total 95 6

7 YEAR To Sep 2011 Share volume (mn) 1,450 1,920 5,856 3,169 6,749 3,843 Equities Turnover (Kshs Billions) T. Bonds Turnover (Kshs Billions) NSE 20 Share Index Market Cap (Kshs Billions) No. of listed companies

8 20.00% 00% 18.00% TRENDS IN CAPITAL MARKETS PERFORMANCE KENYA 2006 TO SEPTEMBER 30, % 16.00% 14.00% Equity Turnover as a % of GDP Bond Turnover as a % of GDP 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 13.70% 4.80% 5.86% 4.63% 4.60% 4.06% 4.87% 2.99% 4.71% 2.22% 1.68%

9 REFORM CATALYSTS Key developments significant to the capital market: Coming into effect of the EAC Common Market Protocol (July 2010); Promulgation of the new Constitution (August 2010); Assessment by the US Securities and Exchange Commission of the Kenya s yas capital a markets (August 2010); 0); Policy and legislative changes e.g. Anti money laundering law (June 2010); Policy pronouncements in the Budget Statement and Finance Bill 2011(Effective Jan 2012 on enactment of Finance Bill) 9

10 STRATEGIC AREAS OF FOCUS 1. Development of capital markets products and services - REITS, ABS, exchange traded funds, sharia compliant products, SME market segment, Futures exchange market, OTC for bonds and equities 2. Establishment of a robust facilitative, legal and regulatory framework - Capital Markets Authority Bill 2011, Securities Industry Bill 2011 and Central Depositories (Amendment) Bill Market infrastructure, capacity and institutional arrangement - Demutualization ti of the NSE; Online/ internet t trading; Implementation of RBS ; Credit rating; Enhancement of the clearing and settlement systems; Strengthening of the ICF 4. Investor education and public awareness 5. Institutional capacity - SRO functions of key institutions; Training and capacity building; Enhance information sharing 10

11 RESEARCH ON ISLAMIC FINANCE INDUSTRY

12 HISTORICAL DEVELOPMENT OF THE IFSI 12

13 GLOBAL SIZE OF THE IFSI Islamic financial services industry currently represents approximately only 2% of global assets-growing at over 10% per annum over the past 10 years. Global Islamic finance industry estimated at US$822 billion in Global Shariah-compliant assets projected to reach US$1.6 trillion by Moody s estimates there are currently Islamic Financial Institutions (IFIs) with assets value projected to reach US$ 2.8 trillion by 2018 Islamic commercial banks account for the bulk of assets, with investment banks and Sukuk issues making up most of the remainder. 13

14 GLOBAL SIZE OF THE IFSI Islamic banking industry estimated at US$822 billion (IFSB, 2010) compared with $639 billion in currently estimated at US$ 1 trillion worldwide; Takaful (Insurance) contributions totaled US$ 8.9 billion in 2010; Sharia complaint stocks estimated at US$ 480 billion; Funds under management estimated at $52.3 billion ; US$ billion worth of Sukuk had been issued since 1990 consisting of sovereign, corporate and quasi-sovereign sovereign Sukuk; Other products include the Islamic Derivatives Market; Islamic Swap Market; Islamic Unit Trusts; Islamic ETF s; Islamic REIT s 14

15 TOP 10 BY VALUE OF SHARIAH COMPLIANT ASSETS

16 EMERGING INTEREST IN ISLAMIC FINANCE 16

17 INSTITUTIONS OFFERING MACRO-LEVEL SUPPORT 17

18 LANDSCAPE OF THE IFSI IN AFRICA The Islamic finance market in Africa is potentially worth close to $235 billion, according to Moody's Investors Service. 37 Islamic financial institutions operate in Africa, serving a Muslim population of 412 million inhabitants. Countries currently offering Islamic Finance include: South Africa, Botswana, Kenya, Algeria, Nigeria, Egypt, Sudan, Mauritius and Tunisia. Others contemplating development of the same include Tanzania, Malawi, Zambia, Uganda and Ethiopia. NOTE: North and West Africa account for approximately 78% of African Muslim population. p Egypt is one of the more advanced African countries in Islamic finance. Nigeria has the highest Muslim population in Africa but only opened its first Islamic bank in April Kenya with a Muslim population of app. 10 million launched the first Islamic 18 bank in April 2007

19 SNAPSHOT OF THE ISLAMIC FINANCE INDUSTRY IN KENYA The Central Bank of Kenya (CBK) has licensed two Islamic banks - Gulf African Bank (GAB) and First Community Bank (FCB). In terms of capital and deposits, FCB, is the largest Islamic bank in Kenya with a capitalization of Kshs 1 billion; FCB Capital was approved by CMA in 2009 as the first Islamic Investment Bank in Kenya, offering Islamic asset management business and capital markets products especially Sukuk; k FCB also acts as an Islamic insurance (Takaful) broker for general Takaful products Takaful Insurance of Africa-first fully Shari ah-compliant insurance company in Kenya licensed and launched in January and March 2011 respectively. 19

20 CHALLENGES FACING THE IFSI 20

21 CHALLENGES FACING THE IFSI PRODUCTS AND SERVICES Slow pace of product development and services - inadequate supply of products to meet the growing demand. Products replicate the features of conventional financial products while trying to remain within Shariah bounds - resulted in complicated products which are hard to understand, costly to construct and implement. Pricing challenges - there is no Sharia compliant benchmark within the global financial industry. The secondary market for Islamic products tends to be shallow and illiquidid due to the insufficient i supply of tradable Islamic products as well as the typical buy-and-hold approach of investing institutions. Regulatory challenges separate set of regulations or within the Regulatory challenges separate set of regulations or within the common framework of capital market regulations 21

22 ISSUES IN PRACTICE In order to be deemed as Shariah-compliant, Islamic capital market products and services need to undergo a pre-defined vetting and approval process by Shariah advisers. While some jurisdictions have established regulatory requirements for the appointment of Shariah advisory bodies, there is presently no standardized di d requirement across jurisdictions with Il Islamic capital market activities in respect of the eligibility and qualification of the Shariah advisors. Different jurisdictions have adopted different practices in relation to various Islamic capital market products and services. This is a result of the varying interpretation on various Shariah issues across jurisdictions, which is rooted in the different schools of thoughtht among Shariah h scholars. 22

23 ISSUES IN PRACTICE The unique underlying structure of Islamic transactions inadvertently triggers taxes such as a real property gains tax, income tax and double stamp duty. The tax framework s structure should ensure that there is tax neutrality between Islamic and conventional capital market products. There are presently insufficient numbers of professionals who are well versed in both the capital market and Shariah knowledge. This is due to the relatively short supply of training and professional courses on the Islamic capital market. This, in turn, has constrained product development and the availability of services to investors in relation to the Islamic capital market. 23

24 RECOMMENDATIONS FROM CMA STUDY 1. The Islamic Capital Markets in Kenya should be regulated within the framework of the conventional capital markets in the short-term and fall under the jurisdiction of the CMA; - Focus on corporate governance, disclosures, and responsible pricing (Guidelines to be adopted from existing global standards-islamic); d 2. The Authority to engage with all stakeholders the Islamic financial services industry to develop a homegrown policy and regulatory framework (Islamic Financial Institutions, regulators and Ministry of Finance, Islamic Groups) for Islamic products and services; 3. A Shariah advisory board to be established at national level to provide guidance on product authenticity within the entire Islamic Finance Industry in Kenya through screening and 24 qualification;

25 RECOMMENDATIONS 4. The Authority to facilitate benchmark study tours to jurisdictions with established Islamic capital markets to build capacity - Key focus on Malaysia which has developed its own policy on Islamic Finance; 5. Public sensitization (including non-muslims) on Islamic capital markets products and services 25

26 THE NEXT STEPS

27 ACTIVITY TIMELINE STATUS Develop Policy Framework for Islamic Capital Markets in Kenya. Adoption of Study report policy Sep 2011 Done recommendations Facilitate of a formal round table meetings with stakeholders in the IFSI in Kenya Engage all Islamic Financial markets Oct 2011 Ongoing in Kenya Build Capacity on Islamic Capital Markets Benchmark study tours to jurisdictions i Novwith developed Islamic capital December markets/invite Islamic Scholars and 2011 experts on capital markets to Kenya 27

28 ACTIVITY TIMELINE STATUS Build Capacity onislamic Il Capital Markets Incorporate study tour report findings December into the implementation road map 2011 Conduct Public Sensitization on Islamic Capital Markets Hold stakeholder sensitization Nov workshops March 2012 Final Policy and Regulatory Framework for ICM Adoption of policy framework by CMA Board Jan 2012 Sb Submission i of Pli Policy Proposals to Fb2012 Feb Treasury 28

29 FOCUS OF THE CONSULTATIVE ROUND TABLE MEETING To share key findings and recommendations of Capital Markets Authority research into Islamic Finance; To brainstorm on the road map for developing a nationwide/region-wide policy, regulatory and institutional framework for Islamic capital markets in Kenya: -Establishment of a Task Force to oversee Islamic capital markets - Scope of Islamic Product and Services (including derivatives) - Model of Islamic Capital Markets (Capital Markets or Financial Markets?) - Policy Framework - Regulatory Framework - Key players in an Islamic financial markets 29

30 FOCUS OF THE CONSULTATIVE ROUND TABLE MEETING Capacity Building Any other jurisdictions for benchmark studies Resident Advisors Sensitization 30

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